Taxes have always been pretty easy for Enrique. He received W-2s, did the calculations himself and usually got a nice return. Then last year all that changed, after he signed up to drive for Lyft and Uber.
The income Enrique earns from driving for these ride-service companies makes him a sort of independent contractor, which raises a lot more tax questions than working as an employee does. Now Enrique has to keep track of his income and deductions, maintain records and save receipts.
“It's a brand-new world,” Enrique says. And he's still trying to figure it all out.
Enrique does not want to use his full name because he is afraid the companies won't appreciate his criticism. He says it's pretty much all up to the drivers to figure out everything about this job -- what's legal, what's safe and how to do the taxes.
I've got firsthand experience for this story. Last winter I drove some for Lyft. I was interviewing passengers to make a podcast. I've worked as a freelancer for years, so I was used to handling more complicated taxes. But that is not the case for Enrique.
Like many new gig workers, Enrique has never owned a business nor been an independent contractor. He is unsure what to deduct and what records to keep. He says it is hard to get the information he needs. That's why he met with tax adviser Matthew Whatley.
Uber and Lyft provide drivers with statistics about their rides, but on their websites they urge drivers to seek professional tax advice. Whatley says people who come to him, like Enrique, are unprepared come tax time.
“I've never seen a single person from Lyft or Uber come in that had any idea of what their tax liability was or what kind of records to keep," Whatley says. "Not one.”
Taxes for this new kind of gig work are confusing, Whatley says. Not every gig company handles taxes the same way. Sometimes workers get tax forms stating their income; other times they don’t. Some drivers haven’t paid taxes for a few years, he says. Others are paying more than they should.
“These people are literally thrown to the wolves,” Whatley says. “They are being put in a tax meat grinder.”
Whatley says many don't realize the extra load put on contractors when it comes to taxes. First, contractors have higher tax burdens than employees. That's because for employees, companies pay half the Social Security and Medicare taxes. Contractors also have to keep their own records -- mileage logs, gas receipts and other deductible expenses.
This is all a surprisingly big obligation the companies are not upfront about, Enrique says. The advertisements soliciting drivers say how much they will make hourly -- before expenses, taxes and the time spent maintaining records and figuring out deductions.
One of the things gig workers like Enrique have to figure out is a relatively new tax form, the 1099-K. It is different from the 1099 form contractors normally use.
The 1099-K shows total credit card transactions, in this case between the riders and the company. Drivers then have to subtract expenses like tolls and fees they pay to Uber and Lyft. This makes it trickier for drivers to keep track of income, says Patricia Cain, law professor at Santa Clara University.
Cain gives this example: Let's say a driver earns $18,000 of income, but there was $3,500 in fees and tolls that Uber charged to riders. The 1099-K the driver receives would show $21,500 gross income because that was the total of credit card transactions between the riders and Uber. The driver would then have to account for all the expenses that make up the difference.
Cain says 1099-Ks were not originally designed for this kind of gig work. They were developed in 2008 to track income that people make from sites like eBay and Etsy.
So, why are these gig companies using the new forms? In an email, Lyft wrote that the 1099-K complies with tax rules. Uber did not respond.
David Gamage is a professor of tax law at UC Berkeley. He says the 1099-K could be part of a business strategy. It may be an effort to look more like an online marketplace that connect drivers with riders, rather than a company that contracts with those drivers.
“It's entirely possible that a primary reason for their adopting these structures is to want to distance themselves from the actions of their drivers,” Gamage says.
The exact nature of the relationship between the companies and drivers is an important issue. Right now there are two class-action lawsuits in California in which drivers are alleging that they are actually employees rather than independent contractors. If the lawsuits succeed, companies like Uber and Lyft would have to pay a lot more in taxes.
For Enrique, doing his taxes has been illuminating. He finally saw what he was actually earning -- less than minimum wage. He realized he needed to drive more than 30 hours a week to have anything left over after expenses.
“I know I need to be driving more,” Enrique says, “but I want to be able to live a life and see the sun.”
Now though, Enrique is committed to gig work. Last year he quit his day job and bought a Prius. He has car payments and high insurance premiums.
Enrique's plan is to drive more. He just signed up to deliver food through another gig website.